Should I File for Bankruptcy at Tax Time?

As tax time approaches annually after the New Year, many Florida residents who have been considering the possibility of a personal bankruptcy filing are unsure about how they should plan the timing of their case. In other words, you may be wondering if it makes sense to file for bankruptcy around tax time, or if it might make more sense to wait until after you have filed this year’s taxes. There are some important considerations to take into account, and you should always discuss the specific details of your case with a Florida bankruptcy lawyer so that you can aim to file your bankruptcy petition at the best time, and in a complete manner, given your particular circumstances. In the meantime, consider some of the following information to help guide your thinking about bankruptcy and tax time.

Timing of Your Filing May Affect the Status of Your Refund 

There are generally two things that consumers are thinking about when they are considering the timing of their bankruptcy filing and income tax time: will they be able to keep their income tax refund, and will their past tax debt be dischargeable.

In terms of the first question — the effect of a bankruptcy filing on your refund — will depend on your specific case, including exemptions available to you under the Florida Statutes and the type of consumer bankruptcy for which you are planning to file.

In a Chapter 7 case, if you receive a tax refund that is for taxes from a year after you filed your bankruptcy petition, it will not become part of the bankruptcy estate. However, if the refund is for a tax year prior to the date of your bankruptcy filing, then it will become part of the bankruptcy estate. Whether you can keep the refund will depend on whether you can use one of Florida’s exemptions to “exempt” the refund amount. Most Floridians will end up using the wildcard exemption, which allows an individual to exempt up to $4,000 of property of their choosing if they do not use Florida’s generous homestead exemption, or $1,000 if they do.

Chapter 13 cases work a bit differently. Once you have an active or ongoing Chapter 13 case — which will last from three to five years — tax refunds will become part of the bankruptcy estate.

Timing Associated with Unpaid Tax Debt Will Affect the Dischargeability of the Debt 

What about having tax debt discharged? If you are going to end up with tax debt you owe on this year’s tax return, for example, should you file your taxes first and then file for bankruptcy afterward in order to seek a discharge of that debt? Discharging tax debt is much more complicated than this, and very recent tax debt is not dischargeable.

In order to have tax debt discharged, that debt must meet a number of specific requirements. It must be federal income tax debt (which is usually the case for Floridians since there is no state tax), and it must be at least three years old as of the date when you file your bankruptcy petition. The IRS must have also assessed that debt at least 240 days before your bankruptcy filing, and you must have filed a valid tax return associated with the debt you want to have discharged. Finally, the debt cannot be associated with tax evasion or tax fraud.

Contact a Bankruptcy Attorney in St. Petersburg, Florida 

Any questions you have about consumer bankruptcy can be addressed by one of the experienced St. Petersburg bankruptcy lawyers at the Law Offices of Stephen Barszcz. Do not hesitate to get in touch with us to find out more about how we can help with your bankruptcy plans, or to begin working on your bankruptcy filing. Contact us today to get started.

Sources:

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0222/Sections/0222.25.html

uscourts.gov/court-programs/bankruptcy/bankruptcy-basics